When to Refinance a Home Loan

When was the last time you reviewed your mortgage?

Most people simply continue making payments year after year without even bothering to review their loan. But circumstances change and a lot can happen in a short period. Homeownership goals could change, new loan features could become available or an investment opportunity may present itself.

So your current mortgage may not be ideally suited to your needs.

Continuing to make payments without reviewing your mortgage could be limiting your options or even be costing you. So what can you do if your loan is no longer right for you?

One option is to refinance.

What is Refinancing?

Refinancing involves replacing an existing loan with a new one. The first loan is essentially paid off and you continue making payments on the newly created mortgage as before. Most borrowers refinance as a way to secure better rates and save on interest over the long term.

Saving money certainly sounds appealing. But refinancing without carefully evaluating reasons for doing so could actually end up costing you. Whether you should refinance depends on your financial circumstances and what you want to achieve. It is always a good idea to make use of a mortgage calculator to get a quick idea of potential costs or savings.

Here are questions to ask to determine if refinancing is right for you.

Are You Looking to Secure a Better Rate?

Saving on interest can save thousands over the loan term. It’s not surprising this is one of the most common reasons to refinance. Borrowers can replace their current loan with a lower variable rate loan that also offers a line of credit.

But at the same time it may not be in your best option.

Refinancing has a number of costs involved from loan application fees to exit fees. It’s important to calculate these charges and determine whether you can still keep current loan features. In some cases, refinancing may not be beneficial as it could be several years before you reap any savings.

Securing a better rate is not the only reason to refinance. If you fall on financial difficulties whether due to a job change or other circumstances, you can refinance to a longer loan term to reduce the monthly repayments. But keep in mind that it also means paying more in interest over the long term.

Are You Looking to Renovate Your Property?

Renovation projects can easily cost several thousand dollars.

Refinancing to a line of credit loan gives you access to funds that can be used to finance projects. And if your home is worth more than the amount owed, you can refinance to access that equity. This is beneficial to pay for renovations or even larger purchases such as a vehicle.

Are You Considering Consolidating Your Debt?

Refinancing means you can consolidate your debt together at a more favourable rate. It also makes it much easier to manage your payments as it means you only need to make one repayment per fortnight or month.

But there are certain factors to consider.

Rolling debt into your mortgage means higher repayments and a longer time to pay off the loan. If you continue making regular payments, the debt will be paid off with the mortgage which can take as long as 25 years to completely pay off. This dramatically impacts the interest paid because of the length of the loan. Making additional repayments will help to pay off the debt.

When to Refinance

Financial circumstances are different for everyone.

Refinancing depends on your current situation and future goals. So what works for another individual may not translate to similar benefits. This is why it’s important to evaluate your reasons for refinancing and how it fits with your needs.

Borrowers are strongly encouraged to weigh potential savings relative to the cost. In other words, how long will it take to recoup the costs before you start saving?

Most lenders will also require borrowers to maintain their current mortgage for at least 12 months before they can refinance. Therefore you should first check with your lender for details on any restrictions.

Refinancing gives you the flexibility to have a new loan with a different lender but this is not always necessary. In many cases, your existing lender may be able to work with you to secure a better rate or open a line of credit.

Whether you want to get a lower rate, pay for home renovations or consolidate your debt, refinancing can be highly beneficial. But you also need to carefully evaluate if doing so is in your best interest. Working with a mortgage broker can help to better understand your situation and review your options.

[Photo credit: Lending Memo]